A Shift In Russell And NASDAQ Relative Strength And What That Means

If you’re a close follower of the main US Equity Indexes, you probably noticed a visual shift in leadership or the ongoing “relative strength” relationship.

Let’s take a quick look at what’s shifted and what it may mean for the broader market at this critical juncture:

When comparing Relative Strength, we often start with a fixed (common) high or low for a market.

In this case, I selected two which are October 30th (peak for the NASDAQ and especially for the Russell 2000 as shown in the futures contract) and November 7th (‘gap’ peak so far for the S&P 500 and Dow mini futures contracts).

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The most important thing to note is that the Russell and NASDAQ (@TF and @NQ) failed to reach a new intraday or gap high along with the S&P 500 (@ES) and Dow Jones (@YM) on the November 7th opening high.

This indicates relative weakness of the Russell and NASDAQ to the Dow and S&P 500 (or “relative strength” for the Dow/S&P 500 against the NASDAQ/Russell) as seen with the arrows in the comparison chart above.

In fact, the ‘strongest’ index (futures contract) lately has been the Dow Jones which has a rising trendline relative to its October 30th peak (compare it to the S&P 500).

In general, we would want the small-cap Russell 2000 and the tech-heavy NASDAQ indexes to lead (show relative strength) if we want to be bullish or if we expect a continuation of the uptrend in motion and breakout to new highs accordingly.

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Internal Relative Weakness – which is indeed what we’re seeing – tends to suggest that the future swing may easily be to the downside.

That outcome makes sense, given the overhead resistance trendline and short-term/intraday sideways rectangle pattern (with the exception of the Russell 2000 which shows an intraday downtrend in motion).

When we combine the “Message from Market Internals” post from last week and the relative weakness of the Russell and NASDAQ, it indeed paints a picture that odds favor a sell-off occuring from the current resistance levels.

As always, be prepared for a “popped stops/short-squeeze” upside breakout should price defy these factors – we must be prepared for alternate thesis breakout plays as traders (sometimes bigger moves occur when price does something it “should not” do, leading to a larger impulse in the opposite direction as stop-losses are rapidly triggered).